The essence is advance planning. The earlier you start the better, and the more options there are available to you. The starting point is budgeting. Sit down and compare current income to expenditure and look at where savings can be made. It is amazing how much extra cash can be found just by switching providers of items such as; phone, gas, electricity, car insurance, home insurance, credit cards, personal loans and mortgages (remember to check for any penalties).
Clear outstanding debts
Clear outstanding debts before saving (e.g. credit cards); the chances are the interest rate charged on debts will be higher than those earned on savings.
Striking the Right Savings Balance
A balance needs to be struck between short term, medium and long-term savings, and protection. Ideally, in addition to specific savings, you should have a cash reserve for emergencies – a ball park figure is three months’ normal expenditure, but this could be more if you are self-employed or contracting.
Good Savings Options
If you expect to have a family within the next five years look at deposit accounts or alternatively, (often a more attractive option for taxpayers with mortgages), take out a current account or offset mortgage and put any savings toward reducing the sum borrowed. This can then be drawn down as and when additional cash is required. You should look at longer-term savings to cover potential school and/or university fees.
Individual Savings Accounts (ISA’s)
If you have more than five years until you plan to have children there are more options available. The most appropriate investment vehicle will depend on your individual attitude to risk, the sum available to invest, the timescale involved and what you plan to use the money for. Whatever vehicle you choose, good advice is to make the most of your ISA allowances first.
All UK residents who are 18 or over can invest £7,000 per year, every year until April 2006 and then £5,000 per year until April 2009. You could invest up to the full allowance in a maxi stocks and shares ISA, or if you prefer to split your options, up to £3,000 into a mini cash ISA (until 2006 then £1,000 per year thereafter), £1,000 into a mini insurance ISA and £3,000 into a mini stocks and shares ISA. Most people don’t have more than a few thousand pounds a year to invest therefore mini ISAs could be more attractive (they are also the best place for short-term deposit based savings as interest is tax free!). You can invest in one go, in monthly deposits or several payments.
In addition to savings you must ensure you have adequate protection, particularly life cover. First, make sure your will(s) is up to date, and if you don’t have one, get one drawn up immediately. Next, work out how much income would be needed if either you or your partner died, compare that to what you would get from any arrangements you already have in place then take out separate plans to make up any shortfall. A good savings tip for anyone who took out life cover some years ago is to review it; costs have come down and you might get the same cover cheaper elsewhere.
A cost effective way of protecting against the unthinkable is family income benefit. This pays out an income every year in the event of death rather than a lump sum, it also makes calculating how much you need far easier. Make sure any life cover is written ‘under trust’ for two reasons; benefits will be paid out far quicker and the proceeds are ‘out-with’ your estate – so they are not subject to inheritance tax.
Protecting Against Ill Health
Another essential often overlooked. Check what sick pay your (and your partner’s) employers pay, then take out plans to make up any shortfall. Income protection plans (often referred to as permanent health insurance or PHI) are relatively complex and the cheapest is not always the best value for money. It is worth speaking to an independent financial adviser to get the plan that is most appropriate for your needs.
In April 2001 it became possible to continue contributions to a pension even when you were not working, and get tax relief! If you have a pension, try to continue payments if at all possible, particularly if you plan an extended career break. No one can predict the future but maintaining separate pension planning rather than relying on your husband or partner will provide additional financial security and independence.
Finally, don’t get stressed if you can’t achieve all your financial goals at once. Your planning needs will change with your personal circumstances and few, apart from the very organised or very rich, will not have times when finances are stretched. It is always better to get on top of your finances now and do some planning as it will definitely make life a great deal easier in future years for you and your family
- Start saving as soon as you can – find the right savings account to suit you, research different suppliers of utilities to try and make long term savings;
- Clear outstanding debts before you start saving (unless you are paying less interest on your debts than you are on your savings);
- Research into life assurance and income protection plans;
- Try to pay money into a pension your own right;
- Find out what maternity benefits you are entitled to and for how long they will be paid.